What Steps Should Companies Take to Prepare for a Potential US Debt Default?

The United States is on the brink of default as the White House and Republicans in Congress fail to reach a deal on a debt ceiling. This has left business owners concerned about the possibility of a recession and job losses due to defaults. However, experts suggest that there are some measures that firms can take to prepare themselves and protect their interests. These include holding more cash and drawing down short-term Treasury bills maturing within a year. While some argue that the odds of default remain low, the Congressional Budget Office warns of a “substantial risk” that the federal government will not be able to pay all its debts in the first two weeks of June.

Some companies may not be immediately affected by a default, but those with contracts with the government could face payment delays as soon as US cash runs dry. In the event of default, payments can be delayed by several weeks. Therefore, it is important for businesses to have a contingency plan in place. Defense and healthcare tend to be government-funded, which can make them particularly vulnerable to default. Businesses that rely on government payments should prepare for delays. Small businesses frequently use lines of credit to help pay suppliers when they are short on cash, such as after purchasing wholesale goods but before selling to consumers. Banks may choose to cut credit considerably because bank deposits are frequently tied to Treasury bills, which the government may not be able to pay in a timely manner in the event of default.

Companies that hold Treasury bills themselves should consider offloading some Treasury bills. For instance, if they have a Treasury bill maturing in early or mid-June, they should be aware of the risks associated with those bills. Businesses that need immediate payment may choose to deposit their funds in an FDIC-insured account instead of risking a late payment, even if the transaction is likely to lose money.

Director of Entrepreneurship at New York University’s WR Berkley Innovation Lab, Cynthia Franklin, advises companies to be “agile and adaptable” and to diversify their customers so that they are not overly dependent on a single source of income. Companies must also be as efficient as possible to avoid spending more than necessary, she said. Preparing for recessions and economic uncertainty is essentially doing what companies should have been doing all along. “But companies should always keep the basics in mind,” she said.

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